Financial Terrorists Pose Grave Risk to U.S.

Alexandra Frean New York

Last updated February 2 2011 12:01AM

The US financial system remains vulnerable to a co-ordinated act of “financial terrorism” that risks taking down the US economy and collapsing the dollar, according to a confidential report commissioned by the Department of Defence in Washington.

The document warns that forces hostile to the US could mount a “focused effort to collapse the dollar by dumping Treasury bonds” and urges the security services to conduct a further risk assessment “outside of traditional Washington and Wall Street circles”.

It also suggests that the financial meltdown of 2008, which wiped out an estimated $50 trillion of global wealth, may not have been the spontaneous result of poor regulation and bad risk assessment among financial institutions, but a co-ordinated series of attacks by “financial terrorists intent on destroying the American financial system”.

The disclosure of the report’s contents to The Times came as the FBI confirmed that it had warned major Wall Street institutions of a potential threat to their businesses and executives after an al Qaeda-linked magazine, Inspire, suggested that financial markets could be a target of attack.

A spokesman for the FBI in New York confirmed yesterday that security briefings for Wall Street firms took place last month, but said that the information that was discussed was “not imminent, not specific”. The briefings reflect concerns in some quarters of the Pentagon about the vulnerability of America’s financial and economic system to terrorist attack.

The FBI move follows revelations in The Times this week that stock exchanges in Britain and the United States have turned to the security services for help after discovering that they were the victims of terrorist plots and attempted cyber attacks that aimed to spread panic in leading global financial markets last year.

The 110-page document commissioned by the Irregular Warfare Support Program (IWSP) of the US Department of Defence is entitled Economic Warfare: Risks and Responses. It has been circulated among defence chiefs in Washington but has never been made public. It was delivered to the IWSP in June, 2009, eight months after the collapse of Lehman Brothers triggered the financial crisis, but has remained under wraps since then as the attention in Washington focused instead on introducing financial reforms.It resurfaced two months ago when it was submitted by the Department of Defence to the Financial Crisis Inquiry Commission (FCIC), the official US Government-appointed body investigating the causes of the 2008 crisis.

The report examines the possibility that gaps in the US financial regulatory system “were subject to exploitation not only by greedy capitalists seeking profit, but also by financial terrorists intent on destroying the American financial system”. It adds that high levels of debt, especially housing debt, taken on by American households added to the country’s vulnerability.

Drawing heavily on academic and other texts, the report outlines a scenario in which US economic security could be undermined in a three-phase attack. The first could have been the surge in oil prices fuelled by speculators in 2007. The second phase would have begun in 2008 with a series of bear raids targeting US financial services firms, most particularly Bear Stearns and Lehman Brothers, in which investors bet that the stock of those companies would fall in value.

The third phase could take the form of a direct economic attack on the US Treasury and US dollar, the report says.

“A focused effort to collapse the dollar by dumping Treasury bonds has grave implications including the possibility of a downgrading of US debt and… removing [the dollar] from reserve currency status,” it says.

“Such an event has already been discussed by finance ministers in major emerging market nations, such as China and Russia, as well as Iran and the Arab states,” it adds.

The report suggests that any number of foreign-based individuals or organisations, ranging from sovereign wealth funds to Russian mobsters and al-Qaeda and even one or more of Brazil, Russia, India and China could have the means and motive to perpetrate or commission acts of financial and economic terror on the US. While it does not accuse any of these parties of wrongdoing, it outlines the potential threat they pose and concludes that the fact that there is reasonable credibility to this threat “justifies very serious consideration”.

“Ignoring the likelihood of this very real threat ensures a catastrophic event,” it warns. The report recommends the creation of a special unit to “implement appropriate counter-measures to emerging threats in co-ordination with key defence, intelligence, and financial agencies.”

The document’s author, Kevin D Freeman, is founder and chief executive of Freeman Global Investment Counsel, a boutique investment advisory firm, who was commissioned by the Department of Defence in 2009.

Although the views contained in the report represent Mr Freeman’s views and not those of the Department, e-mails seen by The Times confirm that the department commissioned the report, circulated it among defence chiefs and passed it to the FCIC in November or December last year.

The US Department of Defence declined to comment on the report.